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How to use the technical indicator Williams %R

Williams %R or %R(in MT4 it’s knows as Williams’ Percent Range) is an oscillator or also can be considered a momentum indicator, which shows the current closing price in relation to the high and low of the past N days.

%R is calculated using the following formula

%R = (( HH - Today's Close ) / ( HH - LL )) * -100

*Note*

LL = Lowest Low price in Period

HH = Highest High price in Period

%R(Percent Range) helps us identify oversold and overbought areas. %R is similar to the Stochastic Oscillator but it is upside-down. A reading in the range -80% to – 100% means oversold and a reading in the range 0 – 20% means overbought

 

The basic idea when using the %R indicator, we will buy when the currency pair is oversold and sell when it is overbought. A word of caution, with this type of indicators it’s wise to wait for the price to change direction before entering the trade, because even if a pair is oversold/overbought it could continue being oversold/overbought for some time before reversing.

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Something interesting with the %R indicator is that it tends to show potential reversals a few days before they happen (on a daily chart). For an oversold condition it will create a fall and then turn upwards predicting the price action a few days in advance.

In the following chart we see how %R started trending upwards a few days before the price action verified that reversal. So in this case EUR/USD bottomed out at 1.2870, on Jan 10th 2011, and %R had bottomed out on January 7th 2011.

WilliamsPercentRange 

There are many problems with just using this indicator by itself, a better way to use it will be perhaps using it combined with an MA, as you can see in the chart I'm using an MA, the red line is 14 day MA, when the trend is up based on the MA(an angle of 45 degrees) we will only take buy trades, so since we are thinking that the trend is up,, wait for a pull-back and buy. We do this until the MA angle changes or when it's straight it could break out up or down, we wait and see.

Further reading - Technical Indicators in forex



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